Risky business: Les Otten and the rise and fall of American Skiing Co.

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Risky business: Les Otten and the rise and fall of American Skiing Co.

Marian McCue and John Christie

Wednesday, March 10, 2010

Editor’s note: This examination of gubernatorial candidate Leslie B. Otten’s role in American Skiing Co. by the non-profit Maine Center for Public Interest Reporting is the first in a series examining the claims and records of some of the leading candidates for governor.

1996 – In his biggest deal to date, Otten purchases S-K-I, owners of Killington (Vt.), Mt. Snow, Haystack (Vt.), Waterville Valley (N.H.) and a 51 percent interest in Sugarloaf. Due to antitrust concerns about concentration of ski resort ownership in New England, the company, now renamed American Skiing Co., is required to divest Waterville Valley and Mt. Cranmore.

Nov. 6, 1997 – ASC issues an initial stock offering, or IPO, where stock starts trading at $18 per share. The stock quickly falls and never regains that level.

1999 – Due to a high level of debt and the need to raise money for capital expenses and more resort acquisitions, ASC brings in Oak Hill Capital Partners, owned by Texas billionaire Robert Bass, on a preferred stock basis.

1999-2000 – When ASC cannot pay the interest due on Oak Hill's preferred stock, more stock is issued to Oak Hill in lieu of cash, eventually giving them control of the company.

2001 – ASC weighs a merger with Meristar, a resort company, but it is called off.

March 2001 – Otten is removed as CEO of ASC by Oak Hill, which now controls the company, but he retains a seat on the board.

2001 – Otten helps form an investor group to buy the Boston Red Sox.

2002 – ASC is delisted from the New York Stock Exchange for failing to meet the requirements for stock listing.

2006 – ASC continues program of selling off resorts to meet its remaining debt obligations, and prepare for dissolution of the company. In December 2006, ASC announces the sale of Steamboat.

February 2007 – Deals are announced by ASC to sell off Killington, Pico, Attitash and Mt. Snow.

2007 – Otten resigns from the ASC board, and then mounts an unsuccessful bid to buy back Sugarloaf and Sunday River from ASC.

About the center

The Maine Center for Public Interest Reporting is a non-partisan and independent organization that is applying for non-profit status. It was founded in 2009 to provide in-depth reporting on Maine government and politics as a public service to its Maine media partners. Currently, its staff members donate their time.

If you Google “American Skiing Co.” and “Otten,” you get 4,700 “hits.”

That's because Leslie B. Otten’s claim to fame was his attempt to turn that company into the national’s largest and most successful owner of ski resorts, starting with Sunday River in western Maine.

But that attempt ultimately failed, a failure symbolized by the “delisting” of the company by the New York Stock Exchange after it had fallen from a high of $18 per share to well less than $1. Eventually, the company was dissolved.

Now, the 60-year-old Otten wants to be governor of Maine and is scrupulously avoiding his record as the founder and chief executive officer of American Skiing Co.

His Otten for governor Web site claims he was the “head of one of Maine's most successful businesses" – but never names the business. In fact, nowhere in his campaign biography does he mention American Skiing.

Otten is one of seven candidates in the June 8 primary for the Republican gubernatorial nomination. His is considered a leading candidate because of his name recognition and the contributions to his campaign: $671,000 as of January. Of that, $587,000 was his own money.

Otten’s record at American Skiing is relevant to his campaign not only because he touts his business experience, but also because as a CEO of a public company, Otten – like a governor – was entrusted to spend money raised from the public.

The state of Maine’s $5.6 billion budget is funded by the public – the state’s taxpayers. And American Skiing was also funded – at least in large part – by the public. In 1997, it raised $200 million by offering shares in American Skiing Co. in an initial public offering.

The Maine Center for Public Interest Reporting has examined American Skiing Co.’s filings with the federal Securities and Exchange Commission and other records and reports and interviewed experts in the field.

The examination tells the story of an enterprising businessman with a grand vision that never fully materialized. But they also suggest an overly optimistic assessment of that vision that caused the company to become overextended in a business known for being inherently risky due to its dependence on the weather.

The result was that Otten’s stockholders – the public – took deep losses on their investments while he continued to be paid as much as $400,000 annually.

In an interview, Otten said “I think I’ve created value, built businesses that paid taxes, improved school systems. I’ve succeeded in building something to a degree that the others have not done. I have a wealth of experience that others have not had.

“I also think it’s important to look at my contribution with the (Boston) Red Sox, where I helped save Fenway Park and put together a group to buy the team,” he said. “I have also been involved in many philanthropic activities, such as co-founding Maine Handicapped Skiing and saving the Portland Museum of Art.”

Several aspects of his record as American Skiing’s CEO are especially relevant to the Otten campaign – in effect, his job application to the voters to be the state’s next chief executive.

Jobs

The theme of Otten’s campaign is “Jobs for Maine.” His Web site states: “I know how to build jobs in Maine. At Sunday River, I started with just four employees and built a company that became a world-class destination with over twelve hundred employees.”

What Otten doesn’t say is American Skiing’s financial condition was so desperate in 1999 after a winter of poor skiing combined with its debt, that Sunday River employees were told to take five days unpaid leave, and Sugarloaf employees were also asked to take leaves or a 20 percent pay cut, according to a Portland Press Herald story at the time.

Communication

Some of Otten’s own words about American Skiing demonstrate a communication style that can be seen as either overly optimistic, a case of denial or just plain corporate spin.

On October 2000, at the end of the company’s fiscal year, it reported to the SEC that its stock was trading between $1.63 and $2.94 – a decline of 80 percent-plus since inception.

On March 28, 2001, American Skiing announced that Otten was stepping down as CEO and was was being replaced by the chief operating officer, William "B.J." Fair.

Otten said in that statement:

“We have built a remarkable company, and I am confident that the company’s future under B.J’s leadership will continue to improve as it moves into this next phase of development.”

But the company did not “continue to improve.” Quite the opposite; its fortunes declined to a point that just one year after Otten’s signal to the public and stockholders, that things would be better, the company stock had fallen so far that it was thrown off the stock exchange.

Otten said, “It’s up to you to decide if the statement is accurate. I was trying to be gracious and wish the best to the new executives of the company. I was trying to give a hopeful sense; I’m not prone to bashing people.”

Compensation

While American Skiing’s stockholders were taking a bath, Otten’s compensation remained healthy.

SEC filings and newspaper reports show, for example, that his salary went as high as $400,000 and a bonus of $23,000 in 2001. At that point, his salary had grown 16 percent since 1997 while the company’s losses were pegged at $130 million.

Additionally, at that time, Otten’s wife, Christine, was paid $54,000 to run the company’s retail purchasing and had the option to buy stock well below the market value, as did Otten.

An investor who had bought the stock when it first went on the market would have seen a $1,000 investment shrink to just $83 at the time of the SEC filing.

Brad McCurtain of Maine Securities followed the company closely during that period, and he told the Maine Sunday Telegram, “When you look at the year that they had now – they lost $52 million and the stock price is down – what is the justification of paying someone a bonus. What’s the justification for handing out stock options. What are these people doing for you.”

A July 2003 SEC filing reveals that as part of the Otten separation agreement with American Skiing the company paid him and his executive assistant $480,000 (Otten’s share is not broken out) and transfered ownership of a vehicle worth about $20,000 to Otten.

Otten declined to be specific about the amount he lost on the stock. But SEC records show he owned 50 percent of the common shares, which he bought at full value. Depending when he sold them, his losses could be in the millions.

“It was certainly a financial hardship because I lost what I had worked for for 18 years,” he said. “Losing what I had invested was a shock to the system. I needed to go out and do something productive. In getting involved in the Red Sox I saw a great opportunity to fix something that was broken.

"I helped save Fenway Park and put together the ownership group that ran the team as it went on to two world championships. I had lost a lot, but I picked my head up and went on to the Red Sox, that’s what I did – picked myself by my bootstraps. Personal wealth is not a measure of accomplishment.”

Risk vs. reward

Both the financial records of the company and interviews with experts suggest that Otten’s management style is to think big, but to also underestimate the risks in hopes of a big return.

Robert A. G. Monks, a Republican and an investor, was intrigued by the “guy with a little chutzpah from away who proved that he could” exploit the recreation potential hidden in Maine’s western mountains.

“It’s a riches to rags story,” said Monks, a losing Republican Senate candidate in the 1972 and 1996 primaries. He is also a well-known advocate for shareholder rights in public companies.

“I would never have invested in a company like that,” said Monks. “You would never put money in a company that gives you a financial return based only on a two- or three- month season.”

McCurtin, the securities analyst, said, “When I was a kid growing up, Sunday River was really nothing. ... People skied at Mt. Abram or Sugarloaf or Conway. Otten took a very small enterprise and grew it and made it something strong” with savvy marketing and entrepreneurial skills.

Otten recalled, “The state of Maine was crying out to be marketed, and put on a steady footing to succeed,” adding that during some of the early years as the owner of Sunday River, “we hung on by our teeth.”

When he began planning the expansion, the investment banker “Bear Stearns came calling, and I had a meeting with their CEO, Ace Greenberg," Otten said. "There was intense competition among the bankers to help us take the company public, to launch an IPO, or initial public offering of stock.”

“Everybody wanted in on the deal,” he said. “We took at the time what our bankers said was a reasonable amount of risk and debt to take the company forward.”

Phelps Hoyt, a high-yield bonds analyst in Des Moines, Iowa, said Otten was a strong leader who marketed his company effectively to eager financiers.

“We allowed him to be too aggressive in financing a business that had its ups and downs. The ski business is part entertainment and part mountain resort sales and both of these are vulnerable, both to the weather and to the economic downturn,“ Hoyt said.

Junk bonds

The financing of ASC with high-yield bonds – also known as junk bonds – started a downward debt spiral that was impossible to stop when the company didn’t have the cash to meet its obligations.

The IPO initially raised upwards of $200 million, but the company was already carrying a large debt load. In order to execute the company’s plan for raising money to improve its resorts and finance further acquisition, Otten needed even more money.

Those problems were exacerbated by unfavorable weather on the East Coast and in the company’s Rockies resorts, such as the winter of 1998-1999, when the east had an unseasonably warm winter and the west a dry winter.

Eventually, in order to meet operating expenses and finance the new acquisitions that were part of the business plan, Otten turned to Oak Hill Investors, owned by Texas billionaire Robert Bass, and gave them preferred stock, reportedly with dividend payment requirements of 11 and 15 percent.

When American Skiing couldn’t make that, the stock was converted to equity and Oak Hill gained control of the company. They forced Otten out as CEO in 2001, although he retained a seat on the company board.

“A public company may not be the right platform for resort companies,” said Portland attorney Christopher Howard, who worked at American Skiing from 1996-2001 as vice president and chief administrative officer. “The choppiness and lack of predictability in revenues and cash flow is not what shareholders are looking for.”

Howard is a strong supporter of Otten’s gubernatorial bid, and said Otten has shown the ability to lead and “get things done.”

“There are no more than a handful of people in Maine who have achieved what he has been able to achieve,” Howard said.

Warren Cook, who worked at Sugarloaf with Otten and is now the general manager at Saddleback, also points to the rush to go public and make money in the mid-'90s, a phenomenon larger than just Otten’s company.

“It was all part of a gold rush, a greed rush that continued until 2008 when everything came crashing down,” said Cook, who also feels Otten has some attributes that could make him an effective governor, although Cook has not decided whether to support him.

No way out

Asked if Otten was to blame in the story of a company that fell so fast and so hard, McCurtain said his one question is, “Did he bite off more than he can chew? Did he take on too much? You can set out and expect the stars and the moon to align perfectly, but you need to know that it doesn’t always happen.”

But Otten, as he reflects on the company he created and then lost, has no regrets.

“It’s a tough, high risk, high reward business,” he said. “But I would do it all over again.”

Otten argues that had he remained in control of the company, and the company had followed his strategy of growth rather than selling off its parts, there would have been a better result.

“I was always fighting for the common stockholder," he said. "I had a clear vision of improving skier visits and selling the real estate. If we’d held to that vision, things might have turned out better for common shareholders.”

However, Hoyt, the financial analyst, said “Once he did the deals, he had no way to get out of them. He had been too aggressive and got trapped in an untenable situation.

“Perhaps he should have seen that is the kind of business that shouldn‘t have that kind of leverage and I can blame him for that,” Hoyt said. “After all, you are betting with other people’s money.”

Marian McCue, a contributing reporter to the Maine Center for Public Interest Reporting, is the former editor and owner of The Forecaster newspapers and lives in Portland. John Christie is the publisher and senior reporter of the Hallowell-based center. The center can be reached at mainecenter@gmail.com. The Web site is pinetreewatchdog.org.